Headwaters : Announces Results for 1st Qtr Fiscal 2017 (PDF)

N E W S B U L LETIN

FROM:

RE: Headwaters Incorporated 10701 S. River Front Parkway, Suite 300

South Jordan, UT 84095 Phone: (801) 984-9400 NYSE: HW

FOR FURTHER INFORMATION

AT THE COMPANY:

Sharon Madden

Vice President of Investor Relations (801) 984-9400

ANALYST CONTACT:

Tricia Ross Financial Profiles (310) 622-8226

• Agreed to Boral Transaction at US$24.25 Per Share

  • Revenue Increased 17% to $256 Million

    • Operating Income of $19 Million

    • Adjusted EBITDA of $42 Million

• Reaffirm 2017 Adjusted EBITDA Guidance of $235 to $250 Million

• Boral transaction creates substantial incremental value for Headwaters' shareholders

• Signed new fly ash agreements with over 500,000 tons of incremental supply

• Roofing sales up 20% and integration of manufacturing facilities should be completed in the March quarter

• Building products revenue increased 33%

• Construction materials operating income margin of 15.5%, and Adjusted EBITDA margin of 20%

• Repaid $15.0 million of our long-term debt

"Headwaters entered into a definitive merger agreement with Boral Limited (BLD: ASX) pursuant to which Boral will acquire Headwaters Incorporated for US$24.25 per share in cash, representing an aggregate enterprise value of approximately US$2.6 billion. We are pleased to create value for our shareholders and through the combination of businesses create value for our customers as well," said Kirk A. Benson, Chairman and Chief Executive Officer of Headwaters.

"One of our most important objectives for 2017 is to increase supply of high quality fly ash, and we made meaningful progress during the December quarter," continued Mr. Benson. "Many of our 2017 fly ash contract initiatives came to fruition, resulting in an important expansion of expected supply. We've executed four new contracts and also executed an amendment to one of our supply agreements that substantially extended its term. This is a testament to the quality and expertise of our fly ash team and the strong relationships we have with our suppliers.

"We now expect our sales from net new fly ash sources to exceed 500,000 tons in 2017. In addition, increases to our fly ash storage capacity are ahead of schedule and should exceed our forecast, all of which should contribute to a strong year for our Construction Materials segment.

"Adjusted EBITDA in our Building Products segment increased by 20% year-over-year. We experienced solid margin expansion in our stone product group and margin accretion from the addition of windows to our Building Products segment. Roofing products delivered 20% revenue growth, and we anticipate margin expansion as we complete the integration of our stone-coated manufacturing facilities in the March quarter.

Headwaters' first quarter 2017 consolidated revenue increased by 17% to $255.6 million from

$218.4 million for the first quarter of 2016. Gross profit was $70.6 million, compared to $64.3 million in 2016, and operating income was $19.3 million, compared to $24.8 million in 2016. Certain non-routine merger and acquisition-related costs, primarily related to the Boral transaction, impacted operating income in 2017. Adjusted EBITDA increased by $1.7 million to $41.9 million, or 4% over 2016.

Income from continuing operations was $6.7 million, or $0.09 per diluted share, for the first quarter of 2017, compared to $12.9 million, or $0.17 per diluted share, for the first quarter of 2016. First quarter adjusted income from continuing operations was $13.1 million, or $0.17 per diluted share in 2017, compared to $16.2 million, or $0.21 per diluted share in 2016. Discontinued operations were immaterial in both 2017 and 2016.

Although total precipitation in the southern United States during the first quarter of 2017 was less than in the prior year, the actual number of business days with rain increased significantly year-over-year, leading to interruptions in construction activities in the Southeast, and Texas specifically. The increase in rain days negatively impacted revenue for our activities with Southeast exposure, including windows, block, and ash. However, underlying demand remains strong and we anticipate overall growth during the 2017 construction season.

Headwaters' Building Products segment is a national brand leader in innovative building products through superior design, manufacturing, and channel distribution. The segment markets a wide variety of niche building products, including siding accessories, manufactured architectural stone, specialty roofing products, and windows.

Building Products revenue increased 33%, from $101.6 million in the first quarter of 2016 to

$135.0 million in the first quarter of 2017. Gross profit was $38.5 million compared to $32.0 million in 2016 and operating income was $11.4 million compared to $11.7 million in 2016. Adjusted EBITDA increased 20% to $25.1 million, from $20.9 million in 2016.

We completed our first full quarter with the Krestmark window acquisition in our Building Products segment, and as we anticipated, its Adjusted EBITDA margins were accretive to Headwaters. Consistent with our strategy to expand window sales from Texas, west to Phoenix and east to Atlanta, we successfully grew our window sales in Phoenix. In January, we closed a small window acquisition in the Atlanta market. We expect this acquisition to be accretive to both revenue and Adjusted EBITDA in the March quarter and to increase annual window revenue by approximately $20 million. We are now well positioned in the thriving new residential construction markets in the southern half of the United States, and look forward to the continued execution of our growth strategy.

Roofing revenue increased by 20% during the quarter. However, we experienced inefficiencies while consolidating our stone-coated manufacturing facilities, but we expect to complete the integration during the March quarter and benefit from margin expansion. The combination of top line growth and margin expansion should result in superior roofing performance in the second half of the fiscal year.

While we have experienced an increase in resin material costs, including PVC and polypropylene, we believe in the second half of the fiscal year we will be able to pass through these increased costs and mitigate any impact on margins. Accordingly, we are pleased with the 20% increase in Building Products Adjusted EBITDA year-over-year, despite weather impact, roofing manufacturing inefficiencies, and increased raw material and other costs. The combination of passing through costs, improvement in roofing margins, and continued revenue growth positions us well for the 2017 construction season.

Headwaters is the largest domestic manager and marketer of coal combustion products (CCPs), including fly ash. Utilization of these materials improves performance of concrete and concrete construction products while creating significant environmental benefits. Beginning this quarter, we are now reporting our concrete block group in the construction materials segment. Prior period results have also been adjusted to reflect this reporting change in order to have a consistent presentation.

First quarter 2017 revenue increased by 3% to $120.0 million, compared to $116.2 million in 2016. The increase in revenue was primarily attributable to a 30% increase in service revenue, a portion of which was related to the acquisition of SynMat, but also included an an increase in traditional utility service work. Including SynMat, service revenue represented approximately 20% of total segment revenue for the first quarter of 2017 compared to 15% for the same period in 2016.

Gross profit was $31.7 million in 2017, compared to $32.0 million in 2016 and operating income was $18.6 million in 2017, compared to $20.4 million in 2016. Adjusted EBITDA decreased $0.9 million from $24.9 million in 2016 to $24.0 million in 2017. Revenue and Adjusted EBITDA in the 2017 quarter were negatively impacted by rainfall in Texas, as well as normalization of winter weather conditions in the North Central U.S. relative to milder weather conditions last year. An increase in service revenue and the inclusion of the block group into the segment contribute to slightly lower Adjusted EBITDA margins.

Although block was impacted by the number of rain days in the Texas market, we finished the quarter with a record backlog because shipments to a number of large school projects were delayed. We completed the installation of our "big board" block manufacturing machine, expanding our capacity and improving efficiency. As shipments to large school projects begin to reduce our backlog, we anticipate revenue growth and margin expansion.

In 2017, we initially forecast between 200,000 and 300,000 tons of net fly ash sales from new supply contracts. We have executed four new contracts and now expect our sales from net new fly ash sources to exceed 500,000 tons in 2017. We've also executed a service contract to assist a utility at two different sites to convert its wet disposal systems to dry systems, which should generate an increase in service revenue in 2017 and result in a significant increase in fly ash tons available for marketing in 2018.

We also anticipated 150,000 to 250,000 tons of new fly ash from storage and reclamation. Construction on our first 2017 storage project is nearing completion and we currently expect it to receive ash by the end of the March quarter. In addition, we have been able to secure incremental storage totaling over 60,000 tons that wasn't in our original forecast, bringing our 2017 new storage capability to 140,000 tons, and total storage to over 600,000 tons. We are also in negotiations for additional new storage to be located in New England.

We have ordered the equipment for our first reclamation site and our team is mobilizing to begin the preparation work for installation of the equipment. We anticipate that our first fly ash tons from reclamation will be available for sale in the second half of fiscal 2017, and should produce between 50,000 and 100,000 tons of marketable ash annually when fully operational. We are also doing detailed due diligence on two additional reclamation sites.

We initially forecasted between 100,000 and 200,000 tons of additional supply resulting from enhanced utilization. As the value of fly ash increases, it is economically feasible to deploy technology to enhance quality and increase utilization. We are currently installing, or planning to install, our RestoreAir technology at five to six sites for 2017, and may expand this to additional sites as needed. We expect to treat over 250,000 tons of fly ash at these sites. We also plan to convert 100,000 tons of ash from a low value use to high value replacement of portland cement.